Question

If the price elasticity of demand for labor is 0.1 and the wage increased from $11 to $16 an hour, what is the predicted decrease in the level of employment in percentage terms

Answer 1

As a result of the increase in wages, the decrease in the level of employment would be 4.5%.

What is the decrease in the level of employment?

Price elasticity of demand for labor is the percentage change in the demand of labor divided by the percentage change in wages.

It is expected that there is a negative relationship between the demand for labor and wages. When wages increase, the demand for labor declines and when wages decreases, the demand for labor increases.

Price elasticity of demand for labor = percentage change in the demand for labor / percentage change in wages

Percentage change in the demand for labor =  percentage change in wages  x price elasticity of demand for labor

percentage change in wages = [($16 / $11) - 1] x 100 = 45.45%

Percentage change in the demand for labor = 0.1 x 45.45 = 4.5%

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